I write about the Supreme Court, the intersection between the legal and business worlds, and occasionally about politics. I graduated from the University of Michigan Business and Law schools and the Columbia University Graduate School of Journalism. I started my career at Hughes Hubbard & Reed, a corporate law firm. After switching to journalism, I covered the corporate scandals at WorldCom and Adelphia, Eliot Spitzer, the SEC, and the Supreme Court as a reporter for the New York Law Journal. I have also written for American Lawyer Magazine and Legal Affairs Magazine, and authored Children of Armenia: A Forgotten Genocide and the Century-Long Struggle for Justice (Simon & Schuster). Feel free to subscribe to me on Facebook or follow me on Twitter: @mbobelian.

DOJ'S Case Against SAC Capital Is Built On Three Prongs

After months of speculation, the Department of Justice filed a criminal indictment against SAC Capital yesterday, bringing to a head a multi-year investigation of the hedge fund led by Steven Cohen, one of the most successful investors on Wall Street.

The government’s charges, which include one count of wire fraud and four counts of securities fraud, portray a company in which insider trading was “substantial, pervasive and on a scale without known precedent in the hedge fund industry.” Coming in the wake of the massive insider trading scheme orchestrated by another hedge fund titan – Raj Rajaratnam – that is a bold characterization.

The U.S. Attorney’s Office in Manhattan, which initiated the lawsuit, builds its case on three prongs, the crux of which claims that SAC Capital’s top management ignored “indications that trading recommendations were based on Inside Information.”

NEW YORK, NY – JULY 25: U.S. Attorney for the Southern District of New York Preet Bharara announced insider trading charges against SAC Capital. (Image credit: Getty Images via @daylife)

On several occasions, the indictment depicts a hear-no-evil, see-no-evil management style at the hedge fund that tacitly encouraged and rewarded the use of insider information. It cites, by example, an email exchange between Cohen and an employee in which the latter refers to a “guy who runs North American generics business.” Instead of inquiring about the source, who had provided information about acquisitions unknown to the public, the government contends that Cohen simply wrote back: “Let’s talk later.”

On another occasion, Jon Horvath, who pleaded guilty to insider trading last year, emailed Cohen about Sun Microsystems. Of the eight former SAC Capital employees mentioned in the indictment, six have pled guilty to insider trading. The other two, Michael Steinberg and Mathew Martoma, are set to go on trial in November for similar charges. “My edge” Horvath wrote, referring to the quality of the information in his possession, “is contacts at the company and their distribution channel.” Cohen, the government argues, did not inquire whether Horvath’s informants were permitted to share the information with Horvath.

The criminal enterprise, according to the government, also stretched from the hiring process to SAC Capital’s compliance department. Here, the government cites everything from weak document retention policies to a failure to monitor employees’ use of expert networking firms to an unwillingness to investigate suspicious trades. Prosecutors also argued that the hedge fund looked to hire employees “based in part on networks of contacts with employees of public companies,” even if a prospective hire had red flags on his record.

In targeting SAC Capital and various affiliated hedge funds, the indictment did not list any charges against Cohen, who as the sole owner of and largest investor in SAC Capital, has denied any wrongdoing. Despite the lack of charges, Cohen is regularly mentioned throughout the indictment, however. The totality of the specific allegations paint a scathing depiction of him.

“A company reaps what it sows,” Manhattan U.S. Attorney Preet Bharara said in a statement accompanying the release of the indictment. “S.A.C. seeded itself with corrupt traders, empowered to engage in criminal acts by a culture that looked the other way despite red flags all around. S.A.C. deliberately encouraged the no-holds-barred pursuit of an ‘edge’ that literally carried it over the edge into corporate criminality.”

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Good question. Some cases of insider trading are obvious but more sophisticated schemes are harder to detect. And even after the government gets suspicious, it still need to find proof of wrongdoing. All of that takes time.